Self-driving cars and ride-hailing services could make the car-rental industry obsolete—or create a huge opportunity. Here’s how Avis Budget is adapting.

6:30 AM EDT

ARE THERE ANY EXPERIENCES MORE JOYLESS THAN renting a car at the airport? Cranky after a long flight, you clamber onto a crowded shuttle bus. Then you join the line at the counter, waiting your turn to endure a hard sell for insurance policies and a GPS device. (Pro tip: You already have a GPS built into your phone.) Then it’s off to the lot to hunt down your car in a sea of identical sedans. It says something particularly unflattering about this industry that, in a society in which technology makes most routines faster, the average wait time to pick up a rental car got two minutes longer between 2013 and 2017, according to consumer insights firm J.D. Power.

If you’d like to see this whole business model disappear in a cloud of smoke—well, so would a lot of people in the rental-car business. Before long, they hope, you’ll be able to skip the counter-kiosk complex entirely. Once you get to the lot, you’ll use your smartphone to activate your car’s headlights so you can easily find it. Your phone will unlock it and turn on the ignition. You’ll drive off without having to go through yet another line at the don’t-back-up-or-we’ll-puncture-your-tires exit gate. And that’s if you go to the lot at all: Someday, the rental agency may send a self-driving car to pick you up at your terminal.

“In the future, we don’t need to see you at the counter,” says Avis Budget CEO Larry De Shon. Every big rental-car company is taking steps in this direction, but Avis, the smallest of the industry’s “Big Three” by U.S. market share (behind Hertz and Enterprise), is making the most concerted effort to update its 600,000-vehicle fleet—and protect its $9-billion-a-year business from obsolescence.

In the past 18 months, Avis Budget, which owns those two namesake brands along with Payless Car Rental and car-sharing pioneer Zipcar, has struck one partnership after another with Big Tech’s boldface names. In June 2017 it landed a deal with Waymo, Alphabet’s autonomous-vehicle division, to manage its growing fleet of self-driving cars. Soon after, it teamed up with Amazon and Google so customers could use voice tech to make or change reservations. And this August, Avis announced it would begin renting thousands of cars to Lyft drivers.

CEO Larry De Shon is pushing to get all 600,000 cars in the Avis Budget fleet connected to the internet by 2020.

Courtesy of Avis

Underlying all those partnerships, there’s a bigger project at Parsippany, N.J.–based Avis: an endeavor to connect the bulk of its fleet to the Internet by 2020. That’s a more aggressive deadline than any of its rivals have embraced. And it’s no small task for a company that offers 250 different makes of vehicles, scattered across almost 4,400 locations in the Americas alone. But it’s an urgent one, because car connectivity is a cornerstone of the industry’s efforts to keep up with the automobile sector’s dramatic changes.

That hassle-free airport experience, for starters, depends on connectivity. It’ll help Avis wring more revenue out of its cars by increasing their time in service, cutting maintenance costs, and pitching ads and services to drivers. Above all, connectivity will provide the infrastructure to support more self-driving cars—a technology that will inevitably shake up the rental industry.

Shareholders would certainly like to see a shake-up: They’ve driven Avis’s and Hertz’s stock down by more than 50% over the past three years. (Enterprise is privately held.) Profit margins are stagnant, and new competitive pressure is coming from all sides: Ride-hailing services like Uber and Lyft are wooing rental companies’ business customers, and big automakers are contemplating a future as “mobility companies” that rent cars directly to consumers. “In next five years you’re going to have Google, Uber, Avis, Hertz, and Ford all in the same business,” says Neil Abrams, a veteran car-industry analyst.

For Avis, it adds up to an evolve-or-die moment, one in which its rivals will be just as aggressive (indeed, Hertz had a Lyft partnership before Avis did). “This isn’t one where we can sit back for the next 10 years,” says chief innovation officer Arthur Orduña. “We don’t have a heck of a lot of time.”

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AVIS HAS BEEN AHEAD of the curve on many occasions since its debut. The company was founded in 1946—well before air travel went mainstream—on the idea that rental cars should be available at airports. In 1987, Avis was the first rental-car company to introduce a key-drop return process that bypassed the counter; in 1996, it was the first to offer online reservations.

But in recent years, being the Most Innovative Rental-Car Company has been like being the Fastest Turtle. The Big Three have a combined 94% share of the $30 billion U.S. rental market, but that dominance hasn’t translated into pricing power. The giants all offer vehicles from the same carmakers, so they struggle to differentiate themselves. Income from incidentals like GPS and toll-paying devices has waned, even as those add-ons have annoyed customers. The upshot: IBIS World expects the industry’s U.S. revenues to grow just 2% annually through 2023, far slower than the broader travel industry.

Avis hasn’t been immune to the malaise. In 2010, the company earned $41.70 per car per “rental day,” by 2017, that had fallen to $40.03. None of the rental companies scores well on customer surveys, but Avis ranks slightly below its rivals on that front. That makes its tech reinvention that much more critical, as a chance to revitalize its business and a path back into customers’ good graces. “Tech that gets me into the car faster will be a big factor in molding customer satisfaction,” says Michael Taylor, J.D. Power’s head of travel.

Avis’s 2013 acquisition of Zipcar has helped it experiment with car sharing and improve its app.

Courtesy of Avis

Avis began laying the groundwork for a tech-driven rebound in 2013. That year, Avis paid $500 million to acquire Zipcar, the startup that rents cars on an hourly basis from self-service sites scattered through neighborhoods and downtowns. The move seemed quixotic to some—at the time, Hertz was doubling down on its core business, digesting a $2.3 billion acquisition of Dollar Thrifty. But while the car-sharing market remains small, Zipcar has turned into an internal catalyst for ideas about rejuvenating Avis.

Since the acquisition, Avis’s capital spending on technology has tripled, reaching $128 million last year. In 2016, not long after De Shon became CEO, Avis rolled out a new, more sophisticated (and partly Zipcar-inspired) app for its namesake brand that lets customers book or change a reservation, keep receipts and speed up check-ins and drop-offs. Orduña, who became head of innovation that year, set about updating Avis’s tech plumbing. He created an application programming interface (API)—an open software-development system that allows ride-hailing services, digital mapmakers, city planners, and other potential partners to add elements to and share data with Avis’s app. API platforms could be a key revenue driver down the line: Orduña envisions a scenario in which, for example, a department store would pay Avis a fee, in return for which Avis would embed ads in its app to steer users to the store’s website. The app could also literally steer them to the store: A traveler who forgot to pack socks could be chauffeured to a shopping site by her self-driving rental sedan.

Orduña’s team has done even more ambitious work on the connectivity project. In August, Avis reached the milestone of 100,000 vehicles connected to the Internet. The device that’s central to those connections is a contraption installed on the underside of each car’s hood. It’s loaded with sensors that read the car’s vital signs, from its exact location to the precise state of metrics like fuel levels, tire pressure, and brake-pad health.

These prosaic-looking devices could have a big financial impact. For a given car to make a penny of profit for a rental company, it needs to be rented out at least 82% of the time. If Avis can monitor a car’s vital signs in real time, it can avoid spending money servicing cars that don’t need it. Conversely, it can reduce the odds of a breakdown that would take a car out of service (not to mention alienate renters who suffered a roadside mishap).

Location tracking also helps Avis milk more revenue-earning days out of its fleet. When cars get impounded because of parking violations, renters often walk away, leaving the agencies to deal with the consequences—including figuring out where the car has been towed. Avis won’t say how much revenue it loses to this scenario. But it’s a big enough problem that the company has set up geofencing around more than 160 of the country’s biggest impound lots, so it doesn’t have to wait for pound workers to call the company. That move, combined with internal location tracking, has cut the average recovery time for an impounded car by half, to six days. (In a similar if more upscale vein, location tracking helps Avis more quickly retrieve rentals that have been dropped off early at airports that serve the private-jet crowd.)

Connected cars could also allow Avis to widen its customer base, by putting its cars closer to more drivers. The company hopes to become less reliant on airport locations, where it currently gets 70% of its revenue. Avis is talking with retailers, mall developers, and city planners about creating self-service, counter-free hubs where people could pick up and drop off a car, much as they do with Zipcar. “Anywhere I can park five to 10 cars, I can call it a rental location,” says De Shon, the CEO.

Avis has begun testing that model in the Kansas City, Mo., area, where all of its roughly 5,000 cars are connected. Avis is sharing live car-location data to help city planners refine their computerized traffic flow models, the better to determine which roads are used most frequently and to plan repairs more efficiently. In return, Avis stands to get something any city dweller can appreciate: a bunch of dedicated parking spots.

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IF YOU RENT A CAR from some Avis locations in the Phoenix area for three days or more, you’ll soon get an extra perk: a coupon for a ride in a driverless Waymo. Your Jetsons moment, should you choose to accept it, will be part of an experiment with high stakes for Avis and its rivals.

Avis’s shares shot up 21% on the day it announced its Waymo partnership last year. Enterprise and Hertz have been exploring the same terrain, but Avis’s deal with Waymo is the splashiest so far, and Waymo, in turn, is further along in its development than many competitors. While autonomous vehicle (AV) makers have numerous regulatory and technological hurdles to clear, few doubt self-­driving cars’ day is near: Boston Consulting Group estimates that by 2030, 25% of miles driven on U.S. roads could be logged by shared, self-driving electric cars.

For a shared-car business model to work, however, these robo-taxis will need to be on the road practically around the clock, which means they’ll need to be serviced and cleaned far more regularly than typical cars. That’s where the Avis-Waymo deal comes in. In Phoenix, a testing-ground for many AV-makers, Avis is servicing Waymo’s self-­driving Chrysler Pacifica minivans, a fleet of 600 cars and counting. Avis handles tasks like oil changes, tire rotations, and cleaning; Waymo maintains the more high-tech AV hardware.

Providing maintenance for Waymo is giving *Avis* a foot in the door in the self-driving-car industry.

Courtesy of Avis

Avis is betting that its huge infrastructure of garages and storage facilities will make it an essential partner to provide such “fleet management services” for the car-sharing companies of the future. (This, too, will be a hotly contested field: Hertz and Enterprise also have strong fleet-management businesses.) For Avis, deals like its Waymo partnership offer the chance to earn extra revenue without the heavy fixed cost that comes from owning those cars. Waymo and other tech companies, in turn, avoid the expense of managing maintenance. As De Shon puts it, “Why go out and develop something that’s already built?”

Getting a foot in the door with the AV-makers also sets the stage for Avis to someday radically overhaul its own fleet. Hans-Werner Kaas, senior partner at consultancy ­McKinsey & Co., thinks business travelers will be the first to clamor for self-driving rental cars, which will enable them to work instead of drive and still get to their destination. “The value of freed-up time is simply more relevant for them,” says Kaas. Such travelers account for 40% of Avis Budget’s customers: If they want robo-rentals, Avis will need to deliver.

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NOT LONG AGO Larry De Shon’s son called him with some news: The young man, who lives in Chicago, was selling his car because he didn’t need one. The news “broke my heart, because it was his graduation gift,” De Shon recalls. “I ask, ‘How can you sell your car?’ The kid answers, ‘I can take a Zipcar, I can take an Uber.’ ” The upside: The kid also rented cars from Avis four times in the ensuing months, for longer weekend trips.

All signs indicate that car-ownership rates will continue to drop as younger generations opt out. As De Shon’s story suggests, that’s a potential opportunity for rental-car companies. The trend may well create a much bigger customer base. But the rise of Lyft, Uber, and the robo-taxi crowd creates much more competition.

Avis’s Lyft partnership, announced in August, is the latest example of how Avis hopes to use technology to hedge multiple bets. Under the agreement, the Avis brand will provide thousands of cars to Lyft’s Express Drive program, which mobilizes prospective drivers who don’t own cars. The deal gives Avis an in with a future big user of AVs, and more experience working with the ride-sharing business model. It also helps it get more revenue-­generating days out of its regular fleet cars.

Avis’s core business, meanwhile, is far from extinct. Its typical rental today is a four-day contract involving some 450 miles. A family of four landing in Salt Lake City en route to visit the national parks in Utah is not about to use Uber or Lyft. Hertz CEO Kathryn Marinello estimates there is only currently a 10% overlap between the traditional rental-car market and the mostly urban short-haul market where the ride-sharing services dominate.

Still, the change that has swept through that 10% in recent years has shown Avis Budget that it can’t afford to sit still. The tech partnerships, says Orduña, the innovation officer, are finally beginning to change “the perception of us as a dinosaur sitting there, waiting for a comet to hit.”

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FIVE REASONS YOUR RENTAL-CAR COMPANY WILL LOOK VERY DIFFERENT IN FIVE YEARS

1. CONNECTED CARS: The rental-car companies are gradually connecting their millions of vehicles to the Internet. The aim: to cut maintenance costs, make sure cars spend more time on the road, and generate new sources of revenue from selling ads and services. Avis Budget has committed to getting all 600,000 of its cars connected by 2020.

2. AUTONOMOUS VEHICLES: Autonomous vehicles (AVs) are coming, and analysts expect them to be especially attractive to the lucrative businesstraveler market. The rental companies are trying to get in at the ground level with the AV-makers. Key partnerships: Avis and Waymo; Hertz and Aptiv; Enterprise and Voyage.

3. FLEET MANAGEMENT: Rental rates have stalled, so Avis and others want to diversify their revenue sources. With sprawling networks of garages and expertise in maintaining, fixing, and cleaning cars, these companies see opportunity in selling fleet management services to other companies, including AV-makers.

4. CAR SHARING: Car sharing accounts for less than 1% of revenues in the “mobility” sector, but the industry leaders all dabble in the field. This is helping them prepare for a future with more counterfree locations for their rental fleets. Key brands: Zipcar (Avis), EnterpriseCar Share, and Hertz 24/7.

5. RESALE RETAIL: Rental-car companies resell their cars after a few years, and the biggest drag on industry profits has been a weak secondhand auto market. To better control the timing and location of those resales, the Big Three are building their own physical used-car sales lots. Avis now has seven stores and plans to add more.

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A version of this article appears in the November 1, 2018 issue of Fortune with the headline “A Fork In The Road For Avis.”